Financials Surge On Prospects For Fed Stimulus; Waiting For Godot?

By Murray Coleman

After drifting lower on concerns over economic growth and Greece’s debt situation, financial stock ETFs shot higher on Wednesday following indications by Fed Chief Ben Bernanke that more stimulus might be coming if conditions worsened.

The broad Financials Select Sector SPDR (XLF), which fell more than 1% from its late-morning peak to its early afternoon trough, made that up and more after Bernanke held court with the media.

The fund finished 3% higher on the day, snapping a two-session losing streak in which the ETF’s shares had fallen by more than 8%.

While keeping rates low, which figures to keep pressuring lenders’ earnings, Bernanke said that the Fed was open to reinvesting in mortgage-backed securities to help boost the sagging real estate sector. The Fed also said it would continue its “Operation Twist” program of shifting $400 billion in its bond portfolio toward longer maturities and continue reinvesting maturing principal payments into mortgage-backed securities.

The Fed also cut its economic growth outlook while increasing its unemployment forecast.

The SPDR KBW Bank ETF (KBE) closed up 3.4%. Both Bank of America (BAC) and JPMorgan (JPM) rose — BAC by 5% and JPM by 2.8%.

Further aggressive moves by the Fed to stimulate the economy are likely in the near-term, wrote Augustine Faucher of Moody’s Analytics, in a note.

“The Fed is likely to expand its balance sheet again later this year or in early 2012, in another round of quantitative easing,” he asserted. “The central bank could even move beyond purchasing Treasuries, to purchasing corporate debt and even equities. It could also reduce the interest rate on reserves in an effort to encourage bank lending.”

The analyst also believes that the Fed will start to remove some of its policy accommodations in late 2012 as growth picks up and job growth accelerates. Rate hikes are not expected until the middle of 2013.

He says that trends haven’t changed for the sector after Bernanke’s comments. “We’ll stay out until more concrete signs develop of economic stimulus and financials show longer-term upward momentum,” he said in an interview.

The firm’s equity research group today raised its 12-month target on the S&P 500 to 1,360 from 1,260. But they left financials as an “underweight” recommendation. The blue chip benchmark finished today ahead by 1.6% at 1,237.90.

“Within financials, we have a lot of stocks with five- and four-star rankings,” said Stovall in an interveiw. “But in looking at the overall sector, the sentiment is still challenging. Despite short-term relief rallies like we saw today, we think the sector will continue to remain under pressure.”

Still, S&P’s analysts see the early October low on the S&P 500 as the end of the correction that started in late April. In a note this afternoon, Stovall wrote:

“The ’500′ barely escaped a bear market with its 19.4% decline, suggesting the bull market is still alive. While there has been plenty of technical evidence to suggest to us that the worst is over, we are still worried about the action in some markets, and that some of our longer-term indicators have yet to give the all-clear sign.”

Skeptical investors like Faber are stashing money in cash, waiting for clearer signs out of Europe and more concrete signals from the Fed.

Analysts at Citigroup argued late Wednesday that policy makers remain in a “watch and wait” stance in light of stronger third-quarter growth and recent signs of improved consumer spending.

“The message seemed to be that the Fed is (already) providing a tremendous amount of accommodation, and while policymakers are making plans for further action if needed, the Chairman gave no indication that he believes that is imminent or inevitable,” the firm’s analysts told clients.

Side note:The bounce today by stocks after a sharp two-day sell-off generally lacked strong conviction, a sign that big institutions weren’t ready to jump into the fray. While seeing afternoon movement, XLF’s turnover still wound up below its longer-term daily average.

More broadly, some 4.05 billion shares exchanged hands in NYSE composite volume, which marked the lowest volume day since Oct 17. It was 13% less than the October average and down 7.3% from year-to-date average daily volume of 4.37 billion, according to WSJ Market Data Group.

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Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.